Apple Valley Water System To Cost Town At Least $100 Million

APPLE VALLEY—It is looking increasingly unlikely that the Town of Apple Valley will be able to secure ownership of the Apple Valley Ranchos Water Company for anything less than $100 million.
Last week, Liberty Utilities, an American subsidiary of Canadian-owned Algonquin Power and Utility Corporation, finalized its acquisition of Apple Valley Ranchos by consummating the purchase of Park Water Company from the Carlyle Group.
In 2011, the Carlisle Group, an American multinational private equity and asset management corporation, acquired from the Wheeler Family at a cost of $102.2 million the Park Water Company, which in addition to its water holdings in Compton, Downey and Bellflower in Los Angeles County and Apple Valley, also owned the Mountain Water Company, based in Missoula, Montana.
The Carlisle Group packaged the water companies serving Missoula, Bellflower, Compton, Downey, Missoula and Apple Valley together as what it called Western Water Holdings and put them on the market. Last summer, it arranged for Apple Valley Ranchos to acquire, for $300,000, the water system, which serves some 900 residents in the desert community of Yermo, which lies roughly 36 miles from Apple Valley.
Two years ago, the Town of Apple Valley, alarmed at the prospect that the water company serving the community’s 69,135 residents and its businesses was about to be purchased by a Canadian company, challenged the proposed sale by means of a complaint to the California Public Utilities Commission,
Town officials enunciated concern that the joint application left open questions as to how Algonquin/Liberty would balance out the proposed $327 million purchase price for Park Water without subsequently imposing substantial increases in the rates Apple Valley residents and businesses would pay for their water, particularly given that Algonquin/Liberty would need to assume at least $77 million of existing long-term debt tied into Park’s assets. A year ago, the California Office of Ratepayer Advocates entered its own protest with regard to the application, citing a succession of issues which were counter to the public interest.
Apple Valley’s move was somewhat late. Shortly after the town’s 1988 incorporation, its maiden town council spurned the Wheelers’ offer to sell the town the Apple Valley Ranchos Water Company for $2.5 million. Town officials at that time were concerned less about the initial expense of acquiring the utility than with the projected ongoing and constant costs of having to repair, upgrade and maintain the system, which was created in 1945 by Newt Bass and B.J. Westlund as an adjunct to their real estate company, Apple Valley Ranchos, their undertaking to develop Apple Valley after they acquired 6,500 acres from the Southern Pacific Railroad for $2.50 per acre. Bass and Westlund installed the minimum amount of infrastructure to support the construction of subdivisions and make the community grow, anticipating that as Apple Valley matured, that infrastructure would be replaced by higher quality pipes, reservoirs, pumping units and appurtenances. It would turn out, however, as the town was built piecemeal, the water company merely expanded with it, a hodgepodge of water mains and lines built one after the other, patched together in correspondence to the new development it was called upon to serve.
In 2011, the same year that the Carlisle Group purchased Park Water, the town of Apple Valley impaneled a so-called blue ribbon committee to consider acquiring Apple Valley Ranchos. Again, however, the town failed to pull the trigger when the committee advised against the acquisition. Prevailing sentiment abruptly changed less than three years later, however, when Park, after beginning to implement in 2012 rate increases on Apple Valley Ranchos customers totaling 19 percent and then completing $8.1 million in capital improvements to the Apple Valley Ranchos Water Company in 2014, instituted another 30 percent rate hike on Apple Valley Ranchos customers to be implemented from 2015 until 2017. Shortly thereafter, town officials began trading notes with Missoula city officials, where Park Water’s Mountain Water Company had likewise escalated rates.
Subsequently, the city of Missoula utilized its power of eminent domain to condemn and seek to acquire Mountain Water Company from Park Water Company. Mountain Water fought the takeover, but when the matter went to trial before Judge Karen Townsend in April 2015 it resulted in Townsend on June 15 entering a judgment in favor of Missoula.
Even before Missoula prevailed in that case, town of Apple Valley officials began angling to take Apple Valley Ranchos away from Park Water Company, banking on a strategy that included blocking Algonquin/Liberty’s acquisition through its protest to the California Public Utility Commission, and then achieving either an amenable or forced purchase of Apple Valley Ranchos through a financing strategy involving issuing bonds to create the capital to make the purchase. The town calculated it would be able to service the bonded indebtedness and carry out improvements to the water system by means of the payments made to the city by water users/customers, i.e., the town’s residents. The town’s officials maintain that the revenue from the water sales will be dedicated solely to this bonded debt service and water division operations and maintenance and can be effectuated without any water rate increases.
That scenario was highly dependent upon Park Water’s willingness to sell the Apple Valley Ranchos water system lock, stock and barrel for a price of the town’s choosing, i.e., around $50 million. In support of this, the town, obtained from what it referred to as “an independent appraisal firm” the rather wishful “fair purchase price” of $45.54 million.
That strategy, however, ran aground when the California Public Utilities Commission’s entered a ruling that the sale to Liberty could proceed. Though the PUC’s action did not rule out the possibility that Apple Valley might acquire Apple Valley Ranchos from Liberty by means of the eminent domain process or otherwise, Liberty’s willingness to pay what the market bears for Park’s collective water assets is a strong indication that the Town of Apple Valley’s notion that it will be able to acquire Apple Valley Ranchos for anything near the $45.54 million the town’s “independent” appraiser previously said it is worth or the $50.3 million offer recently tendered by the town in informal discussions with Park is entirely unrealistic.
In Montana, local water commissioners last June set the fair market price of the Mountain Water Company, which owns and operates 37 mostly shallow and medium-depth wells, at $88.6 million, pursuant to the eminent domain confiscation process of that entity successfully achieved by the City of Missoula through Judge Townsend’s court. Missoula, with 69,821 residents, is comparable in population size to Apple Valley.
In Los Angeles County, Park Water supplies between five and six percent of Compton’s water supply by means of the four wells it operates there, while purchasing somewhere between 92 and 94 percent of the water delivered to Compton from the Central Basin Municipal Water District which wholesales potable water from the Metropolitan Water District of Southern California. In Bellflower and Downey, Park Water supplies about 15 percent of the supply to those two cities with water drawn from the groundwater basin through its eight wells there, while purchasing roughly 81 percent through the Central Basin Municipal Water District.
In addition, the Golden State Water Company also serves the communities of Compton, Downey and Bellflower.
By contrast, the Apple Valley Ranchos Water company operates 24 deep wells throughout Apple Valley and three wells in Yermo.
Though there are other methods of calculating the value of a water purveyor than the sheer number of wells, in using that yardstick, it appears that Apple Valley Ranchos 24-well operation in Apple Valley entails one third of Algonquin’s Western Water Holdings 72-well inventory of water-producing assets. With Algonquin having just paid $327 million for Western Water Holdings, it stands to reason any judge hearing the eminent domain case will accept that Apple Valley Ranchos is valued at $109 million. And while Apple Valley officials are pinning some of their hopes on the City of Missoula challenging, the sale to Algonquin, that action will not change the valuation of the water assets already determined by Judge Townsend.

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